GM 105 - Exam 1 Ch 1 & 2

An industry's current profitability:

On its own tends to be a poor predictor of future profitability

A barrier to entry is:

anything that makes entry into an industry as a new competitor more difficult, more costly, slower or even impossible.

the "market" and the "industry" are:

related but not the same thing.

Having high fixed costs makes it hard to make a profit in a recession, so is indicative of poor cost-control.

False.

The business environment of a firm consists of all the internal and external influences that affect it's performance.

False. The business environment consists of all the external influences that affect its decisions and performance.

Value creation translates directly into profit.

False. The surplus of value over cost is distributed between customers and producers by the forces of competition.

Michael Porter's five forces model is a framework for analyzing the factors that determine a firm's competitive strategy.

False. Used to determine the intensity of competition and levels of competition in different industries.

A 6th force - complements - should arguably be added to P5F model because:

It's clear that since Porter devised his model, complementers have become more important

The core a firm's business environment is determined by:

Its relationships with customers, competitors and suppliers

Which of the following is a framework for categorizing key elements of an organization's external environment?

PEST

A market's boundaries are defined by:

Substitutability on both the demand side and the supply side, combined with an element of judgment depending on context and purpose

In an industry, the profits earned by firms are determined by:

The value of the product for customers, the intensity of competition, and the relative bargaining powers of producers, their suppliers and their buyers.

If top management understands the customers, suppliers, competitors and the general environment then:

They are able to evaluate industry attractiveness

Porter's 5 forces model is intended to be:

Used in conjunction with PEST and other models

Understanding the competitive forces in an industry is:

a way to enable managers to position the firm where its particular capabilities can be deployed to best advantage

Firms in any industry can be said to operate in two major markets:

as a buyer in the market for inputs, and as a seller in the output market.

to forecast industry profitability consistently accruately, profesional analysts have to:

develop a deep understanding of how the industry creates value now and in the future, whether or not they use the tools described in Ch2

The idea with Porter's 5 forces is to:

identify which forces are relatively more powerful, and to assess their impact on competition and industry profitability

If an industry earns a return on capital in excess of its cost of capital:

it is likely to attract the attention of firms looking to enter the industry, which may eventually lead to the return on capital falling.

In practice, drawing the boundaries of industries and markets is:

largely a matter of judgement and experience contingent on the purpose of the analysis

Bargaining power rests, ultimately on:

the perceived or real threat for one party to refuse to deal with the other party.

Value is created when:

the price that the customer is willing to pay for a product exceeds the firm's cost.

Suppose that an industry's profitabilty is zero or negative overall:

then even so it's entirely possible that some firms are making very good profits.

the value to managers of understanding key success factors is:

to help maintain strategic perspective of what needs to be done to survive, and help them avoid degenerating in a fire fighting approach.

The starting point for industry analysis is:

understanding the value of the product to customers, the intensity of competition and the bargaining power of producers relative to their suppliers.

For a specific product or service, the existence of close substitutes means that customers could switch to these substitutes if prices, service levels or other factors make it in their interests to do so.

True.

PEST Analysis is a popular environmental scanning framework.

True

The level of profit in an industry is determined by three factors: the value of products to customers, the intensity of competition, and relative bargaining power of producers and suppliers

True

Value is created when the price the customer is willing to pay for a product exceeds the costs incurred by the firm in supplying the product.

True

We analyze industry structure because this helps us explain variations in the profitability of different industries.

True

When a firm dominates a specific segment it is well-placed to earn a higher level of profit than the average.

True

A high "concentration ratio" is typical of oligopolistic industries, dominated by a few large players.

True.

Economies of scale, absolute cost advantages, high capital start-up costs, and access to channels of distribution are all examples of "barriers to entry".

True.

Excess capacity often leads firms to cut prices to hold on to existing business for fear that competitors will do the same first, leaving them with a lower market share, and adverse average costs.

True.

In a contestable market there doe not always need to be actual competition to keep prices relatively low - just the threat of competitors entering the market.

True.

Key success factors are defined by the market and by customers not by the company.

True.

Porter's 5 forces model arguably has some deficiencies and does not answer all possible questions. This is true of all models.

True.

Retaliation against new entrant may take the form of aggressive price-cutting, increased advertising, sales promotion, or vexatious litigation.

True.

The bargaining power of one player in the industry relative to another player rests, ultimately, on refusal to deal with the other player.

True.

There is no one single defintiion of what an industry is.

True.

Understanding the structure of the industry helps managers to work out how to make a profit in future in future and to possibly identify ways to change the industry structure to their advantage.

True.

Industries such as pharmaceuticals have typically earned high returns on investment because:

have spent large sums on R&D, and have tended to have high entry barriers and differentiated products

which of the following changes in industry structure are likley to improve industry attractiveness

industry consolidation through mergers and takeovers

Systematic, continual scanning of a wide range of external influences would appear desireable but:

merely listing a large number of external factors is rarely helpful, environmental analysis can be expensive to undertake, extensive scanning can result in information overload

The question "what do customers want?:

must be asked by managers, and an accurate answer obtained and understood, since it's the driving force behind generating profit

For a manufacturer access to distrubtion is a barrier to entry becuase:

new entrants face a disadvantage from retailers who are reluctant to carry their new products

Economies of scale are a barrier to entry because:

new entrants face the cost and risk of creating scale capacity to start with or a severe cost disadvantage if they enter on a smaller scale.

Once value is created, it is, in general:

not equally shared between customers and producers.

the question "what does a firm need to survive competition"

requires an understanding of the current and future basis of competiiton specific to the industry

changing the industry structure is:

sometimes possible even by small firms, if the mix of drivers for change and existing structure make is susceptible to change.

Market and industry are:

somewhat flexible in scope depending on what aspect of business you are considering

The overall bargaining power of buyers depends on:

the buyer's price sensitivity and the relative bargaining power between the seller and the buyer

One can view the connection between the general environment and the industry environment as:

the industry environment includes customers, competitors and suppliers, whereas the general environment matters to the extent that it affect the industry environment

The basic premise of industry analysis is that:

the level of profitability within an industry is largely determined by the industry structure

Barriers to exit are:

the non-recoverable costs of quitting or scaling down capacity in an industry.

In Porter's Five Forces framework the term "industry attractiveness" refers to:

the overall industry profitability

The relative bargaining power of buyers depends on:

the size and concentration of buyers relative to suppliers relative to suppliers, a buyer's access to information about products and costs, the ability or threat to integrate vertically.

Analyzing key success factors leads one to ask the following two questions

what do customers want which we could supply profitability and what should the firm do to survive competition?

The bargaining power of suppliers is likely to be high:

when the suppliers' industry is concentrated, when suppliers are supplying differentiated products, when the industry with which suppliers are transacting is relatveily fragmented

Barriers to entry are effective:

yes, becuase long-term empirical evidence shows that industries with high barriers to entry exhibit higher returns on investment on average